Unemployment Accounts and Private Insurance Markets
Volume 73 (2017) / Issue 1, pp. 42-76 (35)
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Whereas a large body of the literature on unemployment accounts (UAs) explores how they could improve labor market and saving incentives, this paper examines how their implementation affects the form and extent of private insurance markets' incompleteness. The analysis is conducted from an alternative perspective. Instead of assuming that markets are nonexistent for exogenous reasons, the source of incomplete risk sharing is modeled endogenously, relying on the assumption of the limited enforceability of private contracts. If the only enforcement mechanism is the threat of exclusion from future insurance markets upon default on existing contracts, the introduction of UAs implies stricter no-default conditions, restricts the set of individually rational contracts, and then limits the private risk sharing.